Spain: On Rajoy’s New Year tax bombshell

A New Year gift it was not.

To the surprise and dismay of the many Spaniards, their new premier Mariano Rajoy announced on December 30 that there would a raft of tax increases: on incomes, interest from savings and a certain properties.

This tax bombshell at the end of a very tough year was not expected, as Rajoy had made no tax rises a key pledge in the election campaign. Yet days after assuming office the Popular Party leader slapped on Euros 6.2 billion worth of them for 2012.

A reduction in taxes over a number of years is at the heart of Spain’s public finance problems, argues United Left, the Government’s fiercest opponent in parliament. Coming under fire for the budget, the small-state low-tax champion Rajoy sought to make political capital over the apparent aligning of positions.

Yet Cayo Lara, leader of the communist-led party, has argued that those with more should pay more in taxes. Instead Rajoy’s rises are deeply regressive, hitting middle and low incomes much harder than the rich.

According to El Publico newspaper the “plebs” will be paying Euros 4.9 billion more while “rentiers, speculators and capitalists” will be coughing up a mere Euros 1.3 billion extra.

Some 60% of the new income for the Treasury generated from the tax rises will come from those earning less than Euros 53,000 a year, leaving many families struggling. Which will not be the case for the very wealthy, who will easily be able to absorb the tax rise of 7% on high incomes and a tax hike on their most expensive properties.

For starters they can dig into the huge piles of money they made last year while unemployment soared to 23% and wages were frozen for millions. Spain’s super-rich apparently amassed Euros 37.7 billion last year, thanks to a Euros 2.2 billion or 6% expansion in their portfolios.

As for large corporations, the source of the wealth of Spain’s superricos, they have been left unscathed – again - despite a decreasing contribution to the economy (currently 1.5% of GDP) . They should already pay 30% on their profits. But the effective tax rate – that is, what companies are actually paying after their accountants have helped them use tax breaks, loopholes and other means to dodge – is currently about 10%.

Another broken promise?

The effect of dropping his promise not to cut taxes means Rajoy has broken another promise – to protect the purchasing power of pensions. While a 1% across the board increase is among the measures announced on December 30, the other tax changes will mean a good number of pensioners will not receive this rise, according to El Pais newspaper. Last year pensions lost 2.9% of their real value thanks to previous Socialist Government’s decision to freeze them amid high inflation.

For United Left’s Cayo Lara the tax changes are not only “unfair”, but will be “ineffective” as lower income groups tend to spend more on the local economy and squeezing their income will therefore undermine domestic demand, hitting jobs and growth.

Other measures in the budget confirms that this is not, as suggested in some media coverage, a budget that soaks the rich.

• Public sector workers, who took a five-per cent pay cut in 2010 and a pay freeze in 2011, will have their wages frozen again in 2012.
• A public sector hiring freeze, except for basic services such as education, health and security forces.
• Freezing of the minimum wage in Spain - already among the lowest in the EU at a little over 600 euros per month - for the first time it was introduced 30 years ago
• Euros 9 billion spending cuts.

Taking orders from Berlin?

Is this all Rajoy’s doing? A year ago he criticised the Socialist government for taking orders from abroad.

“As a Spaniard, I don’t like outsiders telling me what I should do,” he said.

The sad thing is that Rajoy isn’t receiving commands from Europe because he doesn’t need to. As Luis de Guindos, the minister of Economy stated in defence of the tax rises: “If we didn’t do it, others would have forced us,” in clear reference to Berlin and Brussels.

The difference with former pm Jose Luis Zapatero was that the Socialist leader mounted a defence of reflationary policies before caving into “investors” in May 2010. Rajoy instead didn’t wait a week before breaking one of his few clear electoral promises.

As an (important) footnote, Rajoy says such a betrayal of the people who voted for him was necessary to meet “Spanish commitments to Europe.” These are contained in a letter sent by the European Central Banks to Zapatero last August 4 in which a series of austerity measures Spain needed to take in order to obtain (financial) support from the ECB were spelled out.

In opposition at the time, Rajoy demanded that the letter be made public. And he was right. All Spanish citizens have a right to know about such a significant document, agreed in secret behind their backs. Will Rajoy the pm oblige? His first few days in power suggest that on this one too consistency and the truth will not out.

Who else got off lightly from Rajoy’s first budget?

Here’s two lobbies who did:

The Church: It will continue to receive Euros 10 billion annually support from the state, ranging from direct subsidies to exemptions from property taxes, according to El Publico.

The Banks: They have been given a Euros 100 billion subsidy via guarantees hidden in the small print of the budget document published on 31 December, according to a campaign group Platform for Dignified Housing.